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isk in a systematic way: They would agree with a buyer to deliver grain, at some specific date in the
future, at a specific price.
This was a forward contract. But it wasn't until almost 20 years later, in 1865, that a proper futures
market took shape.
So popular did these contracts become in the late 19th century that hundreds of exchanges began
popping up across the United States, specializing in everything from butter and eggs to wheat, cotton
and livestock.
Soon, speculators began to pour into the market, making bets on whether commodities would rise or
fall in value. They never had to take possession of the commodity, but could buy a future at one price,
and then sell it days, weeks, or months later.
Almost from the start, there was controversy. "There was an orgy of speculation and market
manipulation during the Civil War," Dan Morgan wrote in his book the Merchants of Grain. "The
Board printed rules governing trading in 1869, but abuses of all kinds continued - fraud, bribery of
telegraph operators to obtain confidential information (until coded messages were used), and the
spreading of false rumours to influence prices. Outside the trading floor at Jackson and La Salle streets,
bucket shops, not much different from bookie joints or other gambling establishments, flourished."
In Canada, meanwhile, farmers were so upset they pushed the government to create a national cooperative
in order to avoid selling grain through futures markets altogether. Those efforts led to the
formation of the Canadian Wheat Board in 1935.
Even today, North American farmers view speculators as gamblers, exchanging pieces of paper in
hopes that prices will move the way they want them to, but never getting their hands dirty with the
physical product.
Yet, despite this uneasy symbiosis, most would agree that speculation performs a vital role in the
markets: If farmers or food producers want to hedge against their risk by selling a futures contract -
say, to deliver wheat a year from now at $8 a bushel - they need speculators who are willing to buy the
contract in a bet that prices will rise by the delivery date.
The question, going back to the infancy of the markets, was one of balance: How much speculation was
necessary to allow the markets to function smoothly?
After the First World War, when wheat prices plunged, the farming industry blamed the speculators,
accusing them of using short-selling tactics to drive down the market. Widespread instances of market
manipulation, meanwhile, incited Congress to introduce bills attempting to eliminate futures trading
altogether.
Although they were narrowly defeated, problems in the market highlighted the need for improved
regulation, leading first to the Grain Futures Act of 1922, and then to the Commodities Exchange Act
of 1936. The latter expanded the scope of regulation to cover other commodities, including cotton, and
for the first time imposed limits on speculators to prevent manipulation or distortion of the market.
In other words, non-commercial traders in the futures market could only buy a certain amount of wheat,
corn and other products covered under the act.
The measures were put in place to protect farmers, who have a couple of ways to manage their risk:
They can participate directly in the futures market, or they can enter into a forward contract with a
grain elevator, who promises to buy their crop at a certain price. (Canadian farmers sell most of their
wheat through the wheat board, but they use a similar system for selling other crops, including canola).